The opinion of the court was delivered by: JEANNE SCOTT, District Judge
Appeal from the U.S. Bankruptcy Court Central District of Illinois
Judge Larry Lessen, presiding, Bankruptcy
Randolph Martin appeals from the Bankruptcy Court's decision that his
debt to Union Planters Bank National Association (Bank), evidenced by a
promissory note executed on December 17, 2001, was excepted from discharge
pursuant to 11 U.S.C. § 523(a)(2)(B) because Martin secured the loan
through the use of a false financial statement. For the reasons set forth
below, this Court affirms the Bankruptcy Court's decision.
Martin is a cardiologist. He is a partner with 160 other physicians in
a multi-specialty group practice known as Springfield Clinic, LLP
(Springfield Clinic). He
is also an airplane pilot. In 1990 or 1991, he and an individual
named Don Mallette formed a corporation called Capital Aircraft, Inc.
(Corporation). Each owned 49 percent of the stock in the Corporation.
Martin's friend and attorney Jeremy Michaels owned the other two percent.
The Corporation initially sold airplane parts. Most of their business was
in South Africa. Beginning in 1992, the Corporation began selling DC9
aircraft to an airline in South Africa called BOP Air. The Corporation
then began brokering commercial aircraft. The Corporation also maintained
a large aircraft parts business. Most of the Corporation's sales were
outside of the United States.
Beginning in 1998, Martin and Mallette began setting up limited
liability companies (LLCs) to own and lease commercial aircraft and
aircraft engines. Martin and Mallette set up six separate LLCs. Martin
and Mallette formed an additional limited liability company as a holding
company called Capital Aircraft Holding Company, LLC, (Holding Company).
Martin and Mallette each owned 50 percent of the membership interests in
the Holding Company. The Holding Company, in turn, owned membership
interests in each of the six other LLCs. Other investors owned the
remaining membership interests in the LLCs. Many of these investors were
physicians at Springfield Clinic. Each of the LLCs purchased a commercial
grade aircraft or aircraft engines. The LLCs leased the aircraft and
aircraft engines to various clients around the world, mostly in South
Each LLC borrowed money to finance the purchase of its equipment. Each
loan was secured by the equipment and by personal guaranties executed by
of the LLC and by Martin and Mallette as members of the Holding Company.
The Enterprises also sometimes paid other physicians at Springfield
Clinic to execute additional personal guaranties for the loans. Martin
understood that he was personally liable, with the co-guarantors, to pay
the loans if the LLCs defaulted. Martin testified at trial that, "I
believe I signed guarantys for anything I ever did." Record on Appeal
(d/e 1) Document No. 8. Transcript of Trial Proceedings on June 30, 2003
(Trial Transcript) at 43.
Mallette ran the day-to-day operations of the Corporation, the Holding
Company, and the LLCs (collectively the Enterprises). Mallette was the
managing member of each LLC. Mallette testified at trial that he and
Martin had "day-to-day interaction" concerning the operations of the
Enterprises. Trial Transcript at 183. Martin also was a member of the
Board of Directors of the Corporation and was its Chief Executive
Officer. Id. Steven Keith Bentley provided business management consulting
services to the Enterprises from August 1998 to January 2001. He
testified that Mallette ran the day-to-day operations of the
Enterprises. According to Bentley, Martin was involved in
policy-setting, "acting as a member of the board of directors."
Supplemental Record on Appeal Transcript of Deposition of Steven Keith
Bentley (d/e 6) (Deposition) at 57.
According to Martin, the aviation sector deteriorated in 1999 or 2000.
In early 2000, the LLCs' equipment lessees began falling behind in their
rental payments. Martin then started lending money to the Holding Company
to cover the debt service
on the LLCs' loans. Between January 2000 and June 30, 2000, he advanced
over $800,000.00 to the Enterprises. By the summer of 2001, Martin had
advanced over $1,000,000.00. By January 2002, Martin had advanced
approximately $1,700,000.00 to the Enterprises.
Martin also formed a separate corporation called Martin Leasing, Inc.
(Martin Leasing). Martin owned all of the stock of Martin Leasing and was
its only officer. Martin Leasing owned a 1980 Cessna Citation II
(Citation) aircraft which Martin used for his personal travel. Martin
Leasing owed approximately $1,500,000.00 on a loan secured by the
Citation. Martin personally guaranteed this loan.
In November 2001, Timothy Young talked to Martin about refinancing the
Citation. Young was an independent broker who specialized in arranging
aircraft financing loans. Young told Martin that he believed he could
find a loan with a lower interest rate. Martin authorized Young to see if
he could secure a new loan to refinance the Citation.
Martin provided Young with his 1999 and 2000 tax returns and a personal
financial statement dated April 30, 2001 (Financial Statement). Record on
Appeal (d/e 1) Document No. 8. Trial Exhibits Accompanying Trial
Transcript (Exhibit). Exhibit 20. According to Young, Martin confirmed
that the Financial Statement was still currently accurate. Trial
Transcript at 88. The Financial Statement stated that Martin had assets
totaling $6,720,000.00, and liabilities totaling $2,664,000.00, resulting
in a net worth of $4,056,000.00. The Financial Statement disclosed that
Martin excluded his retirement account at Springfield Clinic worth
$350,000.00 from the calculation of his net worth.
The Financial Statement listed the value of Martin's stock in the
Corporation at $350,000.00, and the value of his membership in the
Holding Company at $250,000.00. These values came from Bentley. Bentley
provided Martin with the values for an earlier financial statement dated
June 30, 2000. Bentley testified that these values were accurate
representations of Martin's interest in the Enterprises, at the time he
stopped providing services to the Enterprises, in January 2001.
Deposition at 20, 32.
The Financial Statement contained certain inaccuracies. The Financial
Statement listed the Citation as a personal asset and the loan secured by
the Citation as a personal loan, rather than a corporate asset of Martin
Leasing and a corporate loan which Martin had personally guaranteed.
Martin included a condominium in Florida, valued at $100,000.00, which
was actually titled in his mother's name. Martin, however, paid for the
condominium. Martin listed a motorcycle which he no longer owned. Martin
did not list the $1,000,000.00 plus in loans that he had made to the
Holding Company since January 2000. The Financial Statement overstated
the value of his publicly traded securities in various brokerage
accounts; however, Martin accompanied the Financial Statement with
current account statements from the various
brokers which disclosed the current market value of those assets.*fn1
The Financial Statement also did not disclose the personal guaranties
that Martin signed to guarantee the debts of the Enterprises. At that
time, Martin had guaranteed $23,000,000.00 of the Enterprises' debts.
These debts were also secured by the aircraft, aircraft engines, other
assets of the Enterprises, and by the personal guaranties of the other
investors. Martin testified that Bentley developed the format that he
used for the Financial Statement. Martin testified that he did not list
the guaranties because the format did not include a place for personal
guaranties. He said that he never listed the guaranties on any of the
financial statements he gave to any lender. Trial Transcript at 63. He
testified that the guaranties were not listed as liabilities on the
Financial Statement because he believed that they were not liabilities
because the assets of the Enterprises exceeded the debt. Id. at 45. He
also testified that he believed the co-guarantors were financially
sound. Id. at 65.
Bentley developed the format for the Financial Statement while he was
providing consulting services to the Enterprises. He helped prepare
financial statements for Martin and the other individual investors in the
Enterprises. He did not advise Martin or the other guarantors to list the
personal guaranties on their financial
statements because, during the time that he assisted them, the
Enterprises were solvent and the likelihood that the individuals would be
required to pay the debts was remote. He stated that he would have
advised the guarantors, including Martin, to include the guaranties on
their financial statements if the guarantors had better than a 75 percent
chance of having to pay the debts. Deposition at 28. Bentley stated that
the guaranties were also indirectly reflected on the financial statement
form that he developed in that the value of Martin's interest in the
Corporation and Holding Company was a net value that reflected the value
of the Enterprises' assets less liabilities that Martin personally
guaranteed. Deposition at 23.
Martin's 1999 and 2000 tax returns that Martin gave Young showed that
he had an adjusted gross income in 1999 of $978,046.00 and an adjusted
gross income in 2000 of $587,054.00. Exhibit 2. The difference in income
was due in large part to the reduction in Martin's taxable wages from
$384,705.00 in 1999 to $9,231.00 in 2000. Exhibit 1 at 271, Exhibit 2 at
287.*fn2 The 2000 return showed accumulated passive losses of
$1,621,073.00, from the Enterprises. Exhibit 2 at 283. The returns noted
that Martin's investment in each of the Enterprises, and his interest in
Springfield Clinic, were "at risk." Exhibit 2 at 284 & 314.
Young sent faxes to various lenders notifying them of the opportunity
to refinance the Citation. The fax included basic information about the
Martin, along with the first two pages of Martin's 2000 tax return.
He sent one of these faxes to Michael Holland, a representative of the
Bank who handled airplane financing loans. Holland contacted Young and
asked for more information. On December 11 or 12, 2001, Young forwarded
to Holland the full tax returns and the Financial Statement. Holland
forwarded the information to the loan underwriters for the Bank.
Deborah Culler was the underwriter in charge of evaluating the proposed
loan to Martin. She and her staff reviewed the Financial Statement and
the tax returns received from Young, and secured a credit report. Trial
Transcript at 140. Holland provided information on the estimated value of
a 1980 Citation, such as the one owned by Martin Leasing. Culler stated
that the Bank considered the borrower's ability to generate income to pay
the debt service as a key factor in evaluating these types of loans. The
Bank also considered the value of the collateral and the borrower's
credit history and his other assets.
The proposed loan would be 89.6 percent of the estimated $1,757,000.00
value of the plane. Martin's available disposable income, over and above
taxes and living expenses, equaled 156 percent of his debt service
obligations disclosed on the Financial Statement. Trial Transcript at
146. Martin thus had ample income to make regular payments on his debts,
including the debt service on the Citation. The credit report revealed a
Beacon score of 705. This score is a rating of a person's credit
history. Culler testified that anything over 660 is an excellent score.
The only question in Culler's mind was the reduction in Martin's
taxable wage income from 1999 to 2000. Culler testified that the Bank
contacted Young to find out the reason for the change in income. Young
informed a Bank representative that Martin's wage income was reduced in
2000 because he decided to defer his income from his medical practice
that year. On December 13, 2001, Culler's staff prepared a Credit Memo
recommending that the Bank approve the loan. Exhibit 7. The Credit Memo
referred to information contained in the Financial Statement, the tax
returns, the credit report, and the Beacon score as the basis for the
The Bank followed Culler's recommendation. Martin Leasing signed the
new promissory note in the principal amount of $1,575,560.00 on December
17, 2001. Martin personally guaranteed this debt. The Bank's
representative inspected the plane on December 19, 2001. The Bank's loan
committee formerly approved the loan on December 20, 2001. Exhibit 8 at
363. The Bank funded the loan on December 24, 2001. and paid off the
prior lender. The written report on the inspection of the Citation was
dated December 26, 2001. Exhibit 18 at 479.
The financial problems of the Enterprises continued. In late 2001 and
early 2002. Martin and Mallette attempted to negotiate alternate
financing for the Enterprises. Martin hoped the new financing would
enable him to recover $1,500,000.00 of the $1,700,000.00 that he had
advanced since January 2000. The new financing did not materialize.
Eventually, the Enterprises became insolvent. Martin filed personal
bankruptcy on May 24, 2002.
Martin's first meeting of creditors was scheduled for June 17, 2002.
See 11 U.S. § 341. Pursuant to Bankruptcy Rule 4004, the deadline for
filing complaints to object to the dischargeability of the debt was 60
days thereafter, or August 16, 2002. The June 17, 2002, date for the
first meeting of creditors was continued to August 8, 2002, because the
original Bankruptcy Trustee declined to serve. The meeting began on
August 8, ...